Citigroup's Strange Love Affair with Tenet

On January 21^st, the New York Times reported that “love is in the air” with respect to an increase in mergers and acquisitions. That is certainly the case when it comes to Citigroup’s strange love affair with Tenet Healthcare, which continues unabated. The Times' story, “Mergers Rise and Analysts Take Notice,” profiled the work of Citigroup “strategist” Tobias Levkovich, who went looking for companies with high levels of cash. 

Mr. Levkovich found that Tenet has $1.4 billion in greenbacks at hand. From this, according to the Times report, Citigroup appears to have concluded that Tenet is a bright star in the universe of private equity firms seeking management-led buyouts. Naturally, Citi awards Tenet a “buy” rating.

But it’s important to note that most of Tenet’s cash comes from bonds floated by Citigroup—offerings in which Tenet basically swapped 5% debt for 10% debt—as well as asset sales and tax refunds. Is it a coincidence that Tenet chose Citi to float $1.0 billion in bonds in June 2004, and 15 days later a friendly Citi analyst rated Tenet stock a buy?  Could that be why Tenet rewarded Citi with another $800 million bond offering in January 2005?  Is this another case of a paper thin “Chinese Wall” between investment bankers and analysts?

It will be interesting, we think, to keep an eye on Tenet and Citi in the weeks and months ahead. It will be particularly interesting if news emerges that Citi is preparing to float another bond issue for what many analysts feel is a company in very poor health.

Before recommending that Tenet might be a great candidate for a buyout, wouldn’t it make sense to focus not just on Tenet’s pile of cash, but to look closely at the hemorrhaging of huge sums to fund annual operations? The last time we checked, management-led buyouts need strong positive cash flow – something Tenet hasn’t had for three years. In fact, by our calculations, when the final numbers come in for 2005, Tenet will have lost approximately $5 billion in the last three years.

Maybe Citi’s analysts should take a close look, as well, at Tenet’s possible future liabilities, including an ongoing criminal trial in San Diego, IRS claims, a sprawling Medicare outlier investigation, a probe of suspicious deaths in New Orleans, an SEC inquiry and ongoing lawsuits.

But it seems that Citigroup just has stars in its eyes when it comes to Tenet Healthcare. Or are those dollar signs? We wish the New York Times would take a closer look before launching its own valentines. The same goes for the SEC: we hope that the new SEC chairman, Christopher Cox, will give Tenet a very close look. Tenet shareholders deserve a sound company. The same goes double, of course, for Tenet’s patients.

Tenet’s shareholders, by the way, were not impressed by the ridiculous Citigroup love fest: they continued to sell shares. Yesterday the stock sunk to an intra-day low of $6.93, a near 12 year low. The stock closed at $7.24. Tenet reached a 52-week high of $13.06 last August. From there to here, that’s a 45% decline.

1. Admit to past wrongdoing.

2. Reform the corporate culture.

3. Quickly sell off the hospitals that are bleeding cash.

4. Recruit experienced hospital executives with proven
track records of operating quality hospitals.

5. Put quality patient care first. Profits will follow.